Public Bank: Carried by strength of domestic

Public Bank Bhd
Recommendation: BUY
Share price: RM8.80
Fair value: RM10.40
Carried by strength of domestic operations

* We reiterate our BUY recommendation on Public Bank Bhd (PBank) as we remain convinced this banking group will weather the current economic downturn better than its peers. Our fair value (Gordon Growth model) is raised to RM10.40/share.

* PBank continues to surprise with its ability to chalk up above average loans growth. The banking group's domestic loans book is expected to grow 4% QoQ in 2QFY09, bringing year-to-date loans growth to 8.5%.

* With loan approvals up 10%-12% YoY, PBank is on course to achieving its loans growth target of 15% for FY09F. It continues to focus on lending opportunities in the retail and SME segments.

* Net interest margin (NIM) likely to slip again in 2QFY09, but by a modest 3 bps, as deposits have yet to be fully repriced. Lending spreads for mortgages and SME loans remain under pressure due to competition but this would be somewhat cushioned by better yields for motor loans following revision in hire purchase rates in March 2009.

* Concerns over capital adequacy have abated especially after PBank successfully issued RM1.2bil in non-innovative Tier-1 capital securities in June 2009. The bank's Tier-1 capital ratio is now 11.2%.

* PBank's overseas operations are, however, not doing as well. Public Bank (Hong Kong) Ltd continues to be impacted by the economic recession there. Demand for credit has dried up, causing Public Bank (HK)'s loans portfolio to stagnate although deposits continue to grow at a healthy rate. Its bottomline would also be impacted by rising loan loss provisions.

* Over at Cambodia, net interest margin has narrowed due to rise in cost of funds while lending activities have been hampered by lack of liquidity.

* No material deterioration in asset quality, particularly for domestic operations. Management expects for FY09F credit charge-off of 20-22 bps for its Malaysian operations and a higher 30-40 bps for its business in Hong Kong.

* After some fine-tuning of our forecasts, we expect PBank to post earnings of RM2,327mil (YoY: -4.5%) in FY09F and RM2,634mil (YoY: +13%) in FY10F.

* Our BUY recommendation is premised on the group's healthy balance sheet, good earnings track record, above average ROE and attractive dividend yields. Tier-1 capital ratio of 10% at the parent bank is in line with that of other major banks. Stock offers upside of 18%.

JPmorgan: 14 apr pbbank (overweight)

• Public reported 1Q08 net profit of M$717MM, which is 29% of
the consensus full-year estimate of M$2,469MM and 28% of
JPMorgan’s forecast of M$2,535MM. The strong 51% Y/Y and
24% Q/Q growth in earnings was partially driven by the
M$200MM goodwill payment received from ING during the
quarter. Stripping out the M$200MM, net profit grew 9% Y/Y but
declined 11% Q/Q. The lower Q/Q figures were mainly a result of
higher specific provisions Q/Q (caused mainly by the 7 year rule
for aged NPLs where loans are completely written off).

• Net interest income continues on the uptrend, increasing 3% Q/Q
and 17% Y/Y driven by continued strong expansion in both the
lending and deposit-taking businesses as well as further
improvement in asset quality. Note that loans grew 6% Q/Q and
21% Y/Y, and deposits grew 4% Q/Q and 24% Y/Y. Non-interest
income, stripping out the M$200MM goodwill payment, came in
8% lower Q/Q but 1% higher Y/Y. Fee income declined 16%
mainly due to poorer unit trust sales. The sales of its unit trust
products at launch in 1Q08 are going at one-third 4Q07 levels. Its
net NPL ratio declined to 1.09% from 1.23% in 4Q07 and 1.52% in
1Q07. With regards to the specific provisioning made for the aged
NPLs mentioned above (estimated at M$20MM+), the prospect of
recovery is high based on our conversation with management.

• No dividends were declared in 1Q08 and none were expected. We
maintain our OW rating on Public Bank with a Dec-08 price target
of M$13.80. Our price target is based on a two-stage DDM. We
believe that key risks are an unexpected weakening of consumer
sentiment, and compressed margins as competition becomes more
intense. Note that the foreign shareholding level is at 33.1% as at
31 March 2008.